I worked for a supermarket company that also owned a chain of pharmacy stores. We could never understand why, within the same company, one side, the supermarkets, were so well run, and the other, the drug stores, were so poorly run. I say poorly, but I suppose that’s relative. They were still probably better managed that the average retail store. At least they underwent an inventory 2 or 3 times a year.

One particular store routinely posted the highest shrink percentage of all the stores. The term “shrink,” for those not familiar, simply refers to the inventory shrinkage. Based on the accounting records and the retail method of inventory accounting, we prepared full monthly financial statements for every store and compared them to the budget. The retail inventory accounting method allowed us to estimate the inventory balance using the average retail markup on cost for various categories of goods. It’s a rough estimate, but over time, with very good consistency of operations and accounting, it can become reliable and useful.

When a store was subject to a full inventory count, the actual inventory value was compared to the accounting estimate, and the result was that the actual inventory value had shrunk to become less than the estimate. This is due to many factors, not the least of which is shoplifting and employee theft. Other causes are not tracking or recording breakage and spoilage, price fluctuations, delivery theft, and other errors.

The corporate reaction to a high shrink result was to perform a shrink investigation, led by my internal audit team. We would spend a single day at the store and pour over all aspects of store operations, including watching the store closing procedures the night before, counting the cash on hand, and a review of the pharmacy operations.

Naturally, this store had been the subject of several of these shrink investigations, and we uncovered many operational weaknesses that might easily combine to cause the poor financial performance. Sadly, management never seemed to take a firm hand in turning around the management of the store. It was perplexing and frustrating to us. Finally, we caught a beak. One employee complained that there were nefarious activities at the store. This led to the Loss Prevention team conducting a full loss prevention investigation. Internal Audit worked very closely with Loss Prevention, but we each had a different focus and set of expertise. Internal Audit would focus on policies, procedures, errors and omissions, etc. Loss Prevention was focused on finding out who was the bad guy and how were they stealing. They were very good, very aggressive and very professional.

The upshot of all this was actually a shock. Loss Prevention managed to extract confessions from the perpetrators and those turned out to be EVERY EMPLOYEE IN THE STORE, including the manager and assistant managers! (I don’t believe it included the pharmacy staff.) People would simply walk out of the store after their shift carrying whatever merchandise they wanted. The company closed the store for a day and re-staffed it from surrounding stores. They fired every single store employee except the part-time employee who reported on her co-workers. Amazing.

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